For Now, Buying Is Quicker Than Building
Long distance phone companies are starting to form resale agreements with local carriers to avoid building new networks
P> Now that the Telecommunications Act has passed, long distance phone companies, both large and small, are deciding whether to resell services of their local competitors or build entirely new telephone networks.
Their decisions will set the scene for the new telephony business market.
Although no one knows exactly how all this will result, the weeks following the passage of the legislation have seen a flurry of announcements and alliances that hint at the telecom world to come.
A coalition of small long distance companies met Feb. 8, the day President Clinton signed the bill, to discuss the role of the country's "other" 500 companies besides the big three -- AT&T, Sprint and MCI. The requirement for Baby Bells to resell service to long distance companies at cut rates before the Baby Bells are allowed to move into that market themselves was met with great enthusiasm. "It means small companies can compete," said Kathryn Haycock, president and CEO of Call America, Phoenix. Haycock said her small long distance company would never be able to build new networks by itself.
But even the telecom giants don't want to put money or time into laying lines. "The AT&T strategy is the same as ours in that we need wholesale prices," said H. Brian Thompson, CEO of LCI International Inc., McLean, Va.
Robert Allen, CEO of AT&T, Basking Ridge, N.J., told reporters in a conference call following the president's signing of the telecom bill that his company would provide local service by the end of February. Clearly, that leaves no time to build a new network. "The fastest route into the local service market is through resale of the Bell service capacity," Allen said. He said he expected at least 25 percent discounts. "Even AT&T has limited capital resources. Our intent is not to build any more than is necessary."
However, a few days later, AT&T and MCI Telecommunications Inc., Washington, D.C., said they might form an alliance to split costs of building new networks and would share some of their existing infrastructure. But these plans look like a long-term strategy rather than the quick solution both companies need to get into the business now.
Although they don't have much choice in the matter, the Baby Bells are up in arms over the requirement. "Our issue is that some of the rates [the long distance companies] want are below our costs," said Michel Daley, spokesman for Bell Atlantic-Washington. State utility commissions will decide what discounts are fair.
Some companies already are entering private partnerships. WorldCom Inc., Jackson, Miss., has been especially alliance-minded, signing agreements to provide long distance services for GTE, Southwestern Bell and Ameritech.
Some analysts believe the Baby Bells will take advantage of the long distance companies' need to get to market quickly. "In order to gain market share in long distance, the regional Bell operating companies will price aggressively -- potentially irrationally," according to a report by A.T. Kearney, a division of Electronic Data Systems Corp., Plano, Texas.
But others, including Jack Grubman at Salomon Brothers, New York, said the resale game will work better than that. "Those folks who take the position that the Bells could collude to drive down wholesale long distance rates, while conspiring to keep wholesale local rates artificially high are either assuming blatantly illegal behavior on the part of the Bells...or are assuming legislation is sanctioning unfairness...," he said.
Allen also said the Bells have every incentive to cooperate.